Spain's "Fannie & Freddie" Starting To Show Dramatic Deterioration

Gregory White

Feb. 19, 2010, 10:47 AM

Everyone knows Spain is on the brink of a potentially massive debt crisis, and now their state sponsored entities are starting to show it.

The Spanish Instituto Credito Oficiale, or ICO, is a state backed entity that provides funding to small businesses. It is now showing widening spreads against Spanish government debt, according to FT Alphaville.

They explain that this makes no sense considering the debt is backed by the Kingdom of Spain, unless there is a dramatic drop in market confidence due to European bailout provisions or that the ICO has the wrong idea about how much funding it really needs.

This is not too far removed from what happened with Fannie Mae and Freddie Mac before they were explicitly taken over by the U.S. government. While government backed, these institutions needed to be formally purchased for many reasons including the prevention of their bond spreads from further widening.